Trichet Fights a War on Two Fronts
European Central Bank President Jean- Claude Trichet is fighting a war on two fronts as he seeks to contain price pressures while the Greek crisis threatens to blow the euro area apart.
The ECB will raise interest rates for a second time this year, increasing the benchmark by 25 basis points to 1.5 percent, when council members meet in Frankfurt today, according to all 55 economist forecasts in a Bloomberg News survey. The central bank may increase borrowing costs further in the fourth quarter, according to a separate survey.
Trichet is at odds with European leaders over how to contain the debt crisis, saying it’s up to nations to plug budget gaps as policy makers fight price gains. While the ECB has supported lenders with unlimited cash, authorities are struggling to restore investor confidence. Portugal was cut to junk by Moody’s Investors Service on July 5 on concern the country will need to follow Greece in seeking more aid.
“Trichet has drawn a line in the sand on Greece and he’s now focusing on the day job,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The ECB has done more than governments have to prop up the euro area and it really is losing patience with political leaders. It’s up to them to fix the problem.”
‘Critical Phase’
The ECB will announce its decision at 1:45 p.m. and Trichet, whose term ends on October 31, holds a briefing 45 minutes later. The Bank of England kept its key rate at 0.5 percent today, as predicted by economists in a separate survey.
The euro was at $1.4284 as of 1:03 p.m. in Frankfurt, down 0.2 percent on the day. The currency has shed 2.8 percent against the dollar over the past month.
European finance ministers earlier this month authorized an 8.7 billion-euro ($12 billion) loan payout to Greece in an attempt to avert the region’s first sovereign default. Standard & Poor’s and Fitch Ratings have both indicated they would cut Greece to default if leaders went ahead with a plan to ask creditors to roll over expiring Greek bonds into new debt.
Trichet met with Greek Finance Minister Evangelos Venizelos in Frankfurt today, according to the Finance Ministry in Athens.
“We’re entering a more critical phase” and there’s “a lot of uncertainty in the market,” Christopher Pissarides, professor at the London School of Economics, told Bloomberg Television in an interview in Brussels yesterday. The ECB “can afford to wait a little longer, to make it easier for countries like Greece, Portugal and the periphery that are going deeper into a recession because of these debt problems.”
Waning Confidence
While leaders are still seeking ways to fight the crisis, Europe’s recovery is already losing momentum. Services and manufacturing growth slowed more than estimated in June and economic confidence weakened. In Germany, Europe’s largest economy which has powered the region’s recovery, investor sentiment dropped to a 2 1/2 year low last month.
Weaker growth may help curb price pressures and prompt the ECB to raise interest rates less aggressively than investors and economists initially estimated, said Julian Callow, chief European economist at Barclays Capital in London.
“This may in fact be Trichet’s last interest-rate increase,” he said. “It’s not just Greece; the sands are shifting in the global economy under the ECB’s feet.”
Rate ‘Appetite’
The ECB last month forecast euro-region growth to slow to 1.7 percent next year from 1.9 percent in 2011. The inflation rate may fall below its 2 percent ceiling in 2012, averaging 1.7 percent, the central bank estimated. In June, consumer prices rose 2.7 percent from a year earlier.
Policy makers are concerned that surging energy and commodity costs will spark a wage-price spiral, further entrenching inflation. Trichet on June 30 called for “strong vigilance” on price pressures, a term used in the past to signal an imminent rate increase.
Investors will be looking for clues in Trichet’s language to gauge the central bank’s future interest-rate path. Carsten Brzeski, senior economist at ING Group in Brussels, said that it could be “premature” for markets to “price in a pause following this week’s expected hike.”
“It is sometimes said that one should leave off with an appetite,” he said in an e-mailed note. “However, we don’t believe this applies to the ECB. When it comes to normalizing rates, the ECB still seems too hungry to stop.”
‘Game of Poker’
Trichet may also face questions over the ECB’s collateral policy. Banks can currently obtain as much money as they need for up to three months against eligible assets including government bonds. ECB policy makers have said they may no longer accept Greek debt as collateral if the country defaults.
Moody’s downgrade of Portuguese debt to Ba2, below investment grade, may put further pressure on banks holding those assets and exacerbate the standoff between the ECB and politicians.
It’s a “game of poker,” said Christian Schulz, an economist at Joh. Berenberg Gossler & Co in London, who used to work at the ECB. “The ECB knows it’s the last line of defense in the euro zone but it really is up to the front lines, in other words the governments, to do their job.”
To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
European Central Bank President Jean-Claude Trichet
Hannelore Foerster/Bloomberg
European Central Bank President Jean-Claude Trichet.
European Central Bank President Jean-Claude Trichet. Photographer: Hannelore Foerster/Bloomberg
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European Central Bank President Jean-Claude Trichet
Jason Alden/Bloomberg
Jean-Claude Trichet, president of the European Central Bank.
Jean-Claude Trichet, president of the European Central Bank. Photographer: Jason Alden/Bloomberg
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